The Impact of Government Spending on Road Infrastructure in Nigeria ( )

Transcription

1 The Impact of Government Spending on Road Infrastructure in Nigeria ( ) By PROF. J. B. LONGE Faculty of Social & Management Sciences, Adekunle Ajasin University, Akungba Akoko. and M. B. OMOZUAWO Department of Humanities & Social Sciences, School of General Studies, Auchi Polytechnic, Auchi. Abstract In many developing countries, inadequate road facilities are often the norm rather than the exception. Investment in road infrastructure is one fiscal tool which can provide a critical link in achieving high rate of economic growth fundamental to the economic well being of a nation like Nigeria. However, despite the importance of road infrastructure, the extent to which government spends money on it and the result on economic growth are still subject of debate among economic planners, policy makers and the general public in Nigeria. This study therefore examined the impact of the expenditure on road infrastructure on economic growth in Nigeria from 1980 to The Secondary data used, were obtained from the publications of the Central Bank of Nigeria and Annual Abstract of Statistics. The quantitative method was anchored on Error Correction Model (ECM) using the conventional methods of Augmented Dickey Fuller (ADF) test. Among the findings were that road expenditure was significant in explaining Economic growth and a bi-directional causality between GDP and Road expenditure. This study recommended that government should increase 1

2 The Intuition the expenditure on roads. Alternatively, Private initiatives in road funding should be encouraged by government. The quality of road infrastructure is one of the most important factors stimulating economic development and competitiveness. If bad, it does not provide for proper quality of passenger and cargo traffic services and an effective allocation of industries and services. Bad road infrastructure has a negative impact on foreign direct investments and mobility of labour force. The inadequacy of road network of adequate standard appears nowadays as critical both for national and international transport. All the main cities suffer from the bottlenecks of road safety decrease. The main urban centres are particularly affected by road accidents, congestion and environmental pollution. This results in additional economic, social and ecological costs of road transport which are most dangerous and expensive in terms of human life. The human development aspect is also a major problem. In Nigeria, an average of 30 thousand road accidents are recorded each year, in which almost eight thousand (8,000) people are killed and twenty thousand (20,000) are injured (National Bureau Statistics various issues & Federal Road Safety Corps, 2006). Each year, the social costs of road accidents are estimated at 2.7 percent of GDP and this probably, can be doubled by the external costs in Nigeria (World Health Organisation, 2008). It has also been observed that road networks have not kept pace with growth in demand in Nigeria in particular and Africa in general. Kilometre lengths are limited and construction standard are often low and national roads networks are not coordinated effectively (Wasike, 2000). Furthermore, most road reforms in Africa have been affected by declining government budgets. Deteriorating road conditions are becoming as bad as to become a real hindrance to trade. As at 2000, available statistics reveals that Nigeria has a stock of road network of 195,441 km with Federal government responsible for about 17 percent, state government 16 percent and local government 67 percent. The breakdown of this stock of road network consist of 34, 341km highways (including seven major bridges across the River Niger and Benue, the Lagos ring road, the third mainland bridge), 30,500km of state roads, and 130,600km of local roads (Road vision: 2020). The Government of Nigeria has invested heavily in the development of road infrastructure, yet the services of this sector have "remained generally poor" (Buhari, 2000). However, despite the importance of this sub sector, the extent to which government spends money on it and the result on economic growth are still subject of debate among economic planners, policy makers and the general public in Nigeria. A close look at these debates and government s expenditure committed to the sub sector over the years might not be out of place for study. The pertinent questions emerging at this point are: 2

3 The Impact of Government Spending on Road Infrastructure in Nigeria ( ) - Prof. J. B. Longe and M. B. Omozuawo (i) (ii) (iii) Is there a correlation between government s expenditure on road infrastructure and economic growth? To what extent does the growth in road expenditure impact on the growth of Gross Domestic Product (GDP) in Nigeria? What is the causal relationship between road expenditure and economic growth in Nigeria? Therefore the major objectives of this study are to establish the relationship and estimate the impact of road expenditure on the economic growth in Nigeria and also to determine the causal relationship between road expenditure and economic growth in Nigeria Literature Review Theoretical literature has tried to investigate the relationship between spending on infrastructure and the rate of economic growth. It examines whether public spending on infrastructure increases the long-term steady state growth rate of the economy. This has led to a number of empirical studies been conducted to determine the impact of public spending on economic growth. Over the past decade and a half, a substantial volume of empirical research has been directed towards identifying the elements of public expenditure (at its aggregate and disaggregate levels) that bear significant association with economic growth. Few studies are reviewed in this study. Kweka and Morrissey (1999) studies on government spending and economic growth in Tanzania asserted that the general view is that public investment on physical infrastructure on human capital can enhance growth. However, due to disincentive effects, the financing of such investment might retard growth. This implied that if public investment is financed through taxation, it might crowd out private investment thus leading to negative economic growth. Shioji (2001) based his study on US and Japan. Using panel data for , he found that infrastructure capital has a significant positive effect on long-run output in both countries. Shah (1992) used time-series for and concluded that public infrastructure has positive multiplier effect on output in Mexico. In Nigeria, Aigbokhan (1999) adopted an extended Cobb-Douglas production function in his study on infrastructure, private investment and economic growth in Nigeria. His findings were that infrastructure variables have positive correlation with Economic growth. He observed that if effectively applied, public spending on the services is capable of impacting positively and strongly on growth. He concluded that to promote investment-led growth, the type enumerated in government budget statement, there is 3

4 The Intuition the need to adequately fund infrastructure both to create new capacities as well as maintaining existing capacities. NlSER (2004) study on Effectiveness of Public Expenditure in Nigeria observed that there is a wide gulf between government spending and achievement despite the enormous expenditure announced yearly. The reason for this is that public expenditure may fail to translate into desired and expected service because there is the possibility that the expenditure being directed at the wrong goods. Even when government spends on the right good (such as roads) the money may fail to reach the frontline service provider. Familoni (2007) studies on the role of economic and social infrastructure on economic development revealed that economic infrastructure (particularly road) provided the foundation on which the superstructure of development and growth can be erected. To him, if the foundation is weak and fragile it is doubtful that any superstructure can be built on it. Thus, the better the infrastructure the more successful the economic development polices. Queiroz (2005) asserted that many governments do not have all the financial resources required to expand, maintain, and operate their country's highway networks and other transport infrastructure. The overall resources needed are enormous. From the literature above, it is obvious that studies have been carried out on the impact of government expenditure and economic growth. Notwithstanding, little empirical researches have been done to capture the impact of road expenditure separately as a component of public expenditure on economic growth in developing countries especially in Nigeria. Specifically, the extent to which road expenditure improvements contribute to economic growth is still a debate that has not received indebt attention in Nigeria. There is therefore, the need for a study to advance our knowledge on how road expenditure contributes to economic growth so that policy maker will be sensitized on the need to accord road expenditure its rightful place in the scheme of things hence this study. Research Methodology The data for the study, Road expenditure i.e. recurrent expenditure and capital expenditure, Gross Domestic product and Gross Fixed Capital formation were mainly secondary and time-series in nature. The use of time-series data for this work was most appropriate because the authors were interested in the impact that Road expenditure has on the economic growth of Nigeria. Another reason for the use of time-series data is that Central Bank of Nigeria (CBN) and National Bureau of statistics, Nigeria the sources of the data have time-series annual data that spanned from 1980 to

5 The Impact of Government Spending on Road Infrastructure in Nigeria ( ) - Prof. J. B. Longe and M. B. Omozuawo The approach is based on Cobb-Douglas Production function. Given Y = Ak.. (1) Where A > 0 is the constant net marginal product of capital. The assumption of constant returns becomes more plausible when capital is viewed broadly to encompass human and nonhuman capital. Human investments include education and training, as well as expenses for having and raising children (Barro 1990). Of course, human and nonhuman capital need not be perfect substitutes in production. Therefore, production may show roughly constant returns to scale in the two types of capital taken together but diminishing returns in either input separately. The Ak production function shown in equation (1) can be modified to distinguish between two types of capital, and the model can be extended, to allow for sectors that produce physical and human capital, respectively (Barro 1990). In comparison with the AK model, the main additional results involve transitional dynamics whereby an economy moves from an arbitrary starting ratio of physical to human capital to a steady-state ratio. For studying steady-state growth, however, the important element is constant returns to scale in the factors that can be accumulated, that is, the two types of capital taken together-and not the distinction between the factors. Substituting Q t = A t K t L t (2) {Cobb- Douglas} Road expenditure as public spending defines as G t can enter into the model in two ways- it can influence the multi factor productivity (A) and it could enter the production function directly as the third party. Thus, production function is defined as: Q t = A t K t L t G t (3) {Barro type} Equation 2 can be put in linear form gives. LnQ t = LnK t + LnL t + LnG t. (4), Where Q = GDP Proxy measure of economic growth A = Total Factor Productivity (TFP) at time t: K = Capital stock proxy by Gross Fixed Capital Formation (GFC) L = Labour Capital proxy by Secondary School enrollment (SSE) G = Vector of other variable which is road expenditure (REX) Equation (4) will be transformed to the form LnGDP t = LnGCF t + LnSSE t + LnREX t (5) The estimated economics model for the study will then be 5

6 The Intuition LnGDP t = LnGCF t + LnSSE t + LnREX t + t (6) Where,, and > 0. The conventional methods of Augmented Dickey Fuller (ADF) test for Unit Root Test was employed. The model produced a spurious result hence the Error Correction Model (ECM) as follows: LnGDP t-i = LnGCF t-i + LnSSE t-i + LnREX t-i +ECM t-i (7) Presentation and Interpretation of Results The result of stationarity (unit root) test is shown in table 1.1 below: Table 1: Results of Stationarity (Unit Root) Test Variables ADF Statistics Critical values Order of integration GDP % = % = % = GCF % = % = % = SSE % = % = % = REX % = % = % = Source: Researcher s computation Stationery at second difference Stationery at first difference Stationery at second difference Stationery at level The results of the stationarity (unit root) test at 10 percent level of significant indicated that GDP and SSE were stationary at second difference and, GCF was stationary at first difference while REX was stationery at levels. The Johansen Co-integration Test result in Table 2 below revealed that the residuals from the regression result are stationary at 5% level of significance as the Likelihood statistics of and were greater than the critical values of and respectively. This means that GCF, SSE and REX co-integrated with GDP in Nigeria within the study periods. In order words, there existed a long run stable relationship between the dependent and independent variables. This finding also revealed that any short run deviation in their relationships would return to equilibrium in 6

7 The Impact of Government Spending on Road Infrastructure in Nigeria ( ) - Prof. J. B. Longe and M. B. Omozuawo the long run. It also showed that the deterministic trend is normalized at most 1** with 2 co-integrating equations. Table 2 Result of the Johansen Co-integration Test Date: 01/05/12 Time: 13:07 Sample: Included observation: 28 Test assumption: Linear deterministic trend in the data Series: GDP GCF SSE REX Lag interval: 1 to 1 Likelihood 5 Percent 1 Percent Hypothesized Eigenvalue Ratio Critical Value Critical Value No of CE(s) None** At most 1** At most At most 3 *(**) denotes rejection of the hypothesis at 5%(1%) significance level L.R. test indicates 2 co integrating equation(s) at 5% significance level Source: Researcher Computation Moreover, the Error Correction Variable (ECM) as showed in Table 3 below has a negative sign and was also statistically significant. This implied that the variables were co-integrated. This meant that the speed of adjustment coefficient was significant in the model as well. Since there was existence of long-run relationship among the series, the researchers then went ahead to estimate the ECM for the model. 7

8 The Intuition Table 3 Result of the ECM Test Dependent Variable: DLOG(GDP) Method: Least Squares Date: 01/05/12 Time: 13:14 Sample: Included observation: 29 after adjusting endpoints Variable Coefficient Std. Error t-statistic Prob. C DLOG(GCF) DLOG(SSE) DLOG(REX) ECM(-1) -746E E Source: Researcher Computation The estimation results in table 4 below revealed that the explanatory variables jointly accounted for approximately 97.7 percentage changes in economic growth. The remaining 2.3 percentage was the unexplained variation which is captured by the error term and other social crises. The Durbin Watson statistic (1.78) illustrated the absence of auto correlation. The F-statistic of showed that the overall significance of the model is in order. The results further revealed that a 1 percent increase in Gross Fixed Capital Formation increased economic growth by 4.3 percent. In the model, the level of Gross Fixed Capital formation was consistently significant and established a positive effect on Economic growth in Nigeria. This indicated a positive relationship between GCF and GDP. Also, a 1 percent increase in Secondary School Enrolment led to approximately 1.15 percent increase in economic growth. Thus, increase in Secondary School Enrolment raises the productivity of the people, thereby promoted economic growth. Secondary School Enrolment (SSE) was statistically significant in explaining changes in economic growth. 8

9 The Impact of Government Spending on Road Infrastructure in Nigeria ( ) - Prof. J. B. Longe and M. B. Omozuawo Table 4: Result of the Regression. Dependent Variable: GDP Method: Least Squares Date: 01/05/12 Time: 13:08 Sample: Included observation: 30 Variable Coefficient Std. Error t-statistic Prob. C GCF SSE REX R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E of regression Akaike info criterion Sum squared resid 3.93E+13 Schwarz criterion Long likelihood F-statistic Durbin-Watson stat Prob(F-statistic) Source: Researcher Computation LNGDP = LNGCF LNSSE LNREX The result further revealed that a 1 percent increase in REX increased GDP by 81.0 percent. This result further revealed that the amount of government expenditure on road infrastructure significantly influenced economic growth. Thus, higher government expenditure on road created an enabling environment for businesses to strive through reduced cost of production in Nigeria for the period. The positive contribution of REX as share of real output on real GDP is in line with theoretical expectation. The Granger causality test result is presented in table 5 below. 9

10 The Intuition Table 5: Granger Causality Test Result Null Hypothesis: Obs F-Statistic Probability LNREX does not Granger Cause LNGDP LNGDP does not Granger Cause LNREX Source: Researcher s Computation From the result of the Granger Causality Test, since F* > F tab the researchers reject the null hypothesis that REX does not Granger cause GDP. Also using the alternative decision rule that if the P value of the F-Statistic obtained is sufficiently low, one can reject Ho, otherwise accept (Gujarati, 2003); with P value of , the researchers rejected Ho, that REX does not Granger cause GDP. In the same vein, GDP does not Granger because REX is rejected. Conclusively, causality ran from REX to GDP and from GDP to REX. This means that there was a bi-directional causality or feed-back because GDP Granger caused REX and REX Granger caused GDP in Nigeria for the period under study. This result indicated that the size of Government Expenditure on roads matter and counts. Findings and Recommendation The findings are as follows: i. There is a bi-directional causality or feed-back because Gross Domestic Product Granger causes Road Expenditure and Road Expenditure Granger cause Gross Domestic Product in Nigeria for the period. ii. That Government size of Road Expenditure matters in determining the Economic Growth for the period 1980 to 2009 vice versa. iii. Road expenditure (REX) is significant in explaining economic growth. Following the results reported above, the following recommendations are made. i. Nigeria Government should as a matter of policy increase the expenditure on roads. ii. Alternatively, private initiatives in road funding should be encouraged by government. That is, the private sector should be encouraged by government to fund and finance road construction and maintenance in Nigeria so as to reduce the burden on the government. iii. Other ways of raising the needed funds from the users such as dedicated taxes in the form of tolls collection or taxes specifically earmarked for roads, that is road-user taxes, property taxes or grants from senior levels of government, Parking Fees System, Vehicle Registration Fee, and Road Use Fee in line with the World Bank policies should be evolved. 10

11 The Impact of Government Spending on Road Infrastructure in Nigeria ( ) - Prof. J. B. Longe and M. B. Omozuawo References Aigbokhan, B. E. (1999). Evaluating investment on basic infrastructure in Nigeria. Proceeding of the eighth annual conference of the Zonal Research units (Organised by Research Dept., Central Bank of Nigeria) at Hamdala Hotel, Kaduna, th June, p. 208, Barro, R. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98 (5): Buhari, M. (2000). The Role of infrastructural Development and Rehabilitation in Sustainable Economic Growth in Nigeria. ( Retrieved January 10th 2011 Familoni, K. A. (2007). The role of Economic and Social infrastructure in Economic Development: A global view. Journal of social sciences 2, (2) FRSC (2006). Federal Road Safety commission of Nigeria. (www frscnigeria org/chartabir. Retrieved January 14 th 2011 Gujarati, D. N. (2003). Basic econometrics. McGraw Hill: Fourth Edition, International Edition. New York City pp Kweka, J. P. & Morrissey, O. (1999). Government spending and economic growth: Empirical evidence from Tanzania ( ). DSA Annual Conference. NBS, (2007). Annual Abstract of Statistics. National Bureau of Statistics. NISER (2004). Effectiveness of public expenditure in Nigeria, an EC-EM CAPNSER study submitted to the Federal Government of Nigeria (EC Support). Technical Assistance Office, Ministry of Finance, and Abuja Queiroz, C. (2005). Options for implementing performance-based contracts. Presentation for the World Bank transport forum 2005, Washington, D.C.: World Bank. Also available at: presentations/ Roads Road Vision, (2000). Transport in Nigeria in Steering committee information Brochure, pp 4. 11

12 The Intuition Shah, A. (1992). Dynamics of public infrastructure, industrial productivity and profitability. The Review of Economics and Statistics, 74, (1): Shioji, E. (2001). Public capital and economic growth: A convergence approach. Journal of Economic Growth, 6: Wasike W. S. K. (2000). Road infrastructure policies in Kenya: Historical trends and current challenges. Kenya institute for public policy research and analysis. Working Paper No. 1 WHO (2008). Global status report on road safety time for action. World Health Organization, Geneva, Switzerland 12